Market Direction: BULLISH alert
issued 11/10/2016
U.S.
stock market indices, including those for small-cap equities, rose to all-time
highs again Wednesday.
This
rally has produced overbought conditions and other stresses on the market, but
the most important thing to remember is that the S&P 500, which closed at
2,349 on Wednesday, is in an uptrend until it breaks support.
The
first support area is still that of the late-January and early-February highs,
near 2,300. Below that, it’s 2,270. A violation of 2,270 would be of more
serious concern. And below that, there are a couple more support areas,
as the market has stair-stepped its way higher: the January lows (2,255) and
the late-December lows (2,233).
Equity-only
put-call ratios are declining more rapidly now that this rally has persisted.
The weighted ratio, in fact, made a new yearly low. So these ratios are in
overbought states, but not yet on sell signals. Even a slightly curling upward
path for the ratios — which occurred a few weeks ago — wouldn’t be a true sell
signal. The ratios would have to develop a discernible uptrend in order for them
to turn bearish.
Breadth
was rather poor Tuesday, considering that call buying was heavy and all major
averages were making new all-time highs. On the NYSE, advances outnumbered
declines by only 150 issues. In one sense, that is a sign of a tired market,
but it has been more or less this way since the rally started, at the time of
the U.S. election.
This
has not been an extremely broad rally. Rather, it’s been a rotation of sectors.
Perhaps this is because “Trump stocks” (finance and infrastructure) are favored
over others (pharmaceuticals and health care). It doesn’t really matter, except
to say that not all stocks are following “the market” as they have generally
done for the past eight years.
Despite
that, the breadth indicators remain on buy signals. Both breadth oscillators
that we follow are on buy signals and are in modest overbought territory.
Perhaps more important is the fact that the cumulative “stocks only”
advance-decline line made a new all-time high for the third day in a row.
As
long as cumulative breadth is making new all-time highs along with the market,
that is bullish. It’s when they diverge that one has to be worried.
The
volatility complex has been steadfastly bullish. By that I mean that CBOE
Volatility Index VIX, +11.45% has remained at low levels.
As long as that is the case, stocks can rise. The VIX only becomes problematic
for stocks when it begins to trend higher. That can’t happen unless it exceeds
the mid-January highs and the December double-tops.
Even
so, the levels to which some of these indices have sunk is now beginning to
look a little worrisome to me. The VXST (the CBOE’s Short-term Volatility
Index) closed below 9. The CBOE 100 Volatility Index VXO, +18.74% (known as the “old
VIX”) closed below 10, and the VIX closed below 11. That is a triple
combination that often sets off at least a short-term market correction. For
now, all we can say is that these indices represent an (extreme) overbought
condition.
Considering
the mass of overbought conditions and the somewhat stretched condition of the
overall market, any swift correction could meet an air pocket. In other words,
there could be a quick, very sharp drop. This is what happened after similar
conditions in February 2007, when the S&P 500 dropped 50 points in one day.
After that, the market rallied to higher highs, but the sharpness of that
correction was signaled by extremely low readings for the volatility indices.
That is the danger of dealing with an extremely overbought market — if you
short it, you can get demolished by the continuing upward trend; if you don’t
short it, you can get caught by that sudden downdraft.
In
summary, the market is becoming extremely overbought, but no sell signals have
appeared yet. We are not inclined to short a market without the benefit of any
sell signals, so the best path seems to be to remain long, but tighten trailing
stops and perhaps take some partial profits.
The all-time highs since our initial
recommendation to go LONG
this market. Here is how the markets have performed:
Stock Market
Direction Recommendation (11/10/2016)
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Dow
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up 1,821.57 points a 9.64% gain
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2/15/17
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Nasdaq
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up 613.15 points a 11.77% gain
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2/15/17
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S&P 500
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up 183.82 points a 8.48% gain
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2/15/17
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Related Link: http://www.stockmarket-direction.com/
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